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Add a VIP Revenue Stream to Your Business

If you’re looking for more ways to bring in additional revenue, then a VIP revenue stream is one option for many businesses. Here are a couple of examples:

A plastic surgeon has a long waiting line of patients. The surgeon sets up a special membership fee of $3,000 per year for patients who wish to work with her. These patients get first access to her appointment schedule. They get priority surgery dates and personal care. Her other patients that do not pay are able to see her physician assistant. She earns an extra $300K — insurance-hassle-free — for the hundred patients who join her VIP group.

A pizza restaurant always has long lines during rush hours. The owner sets up a VIP membership of $75 per year for customers who want to bypass the long lines. He dedicates one of his cash registers to the VIP line and staffs it accordingly during rush hour. He sends specials by email and a birthday coupon to the VIP members. Five hundred customers sign up, grossing an extra $37,500 with little or no additional expenses.

A consultant has a couple of clients that want to have access to her 24/7. She sets up a special retainer of $1,500 per month for these clients and provides her cell number. Since they are busy CEOs, they only call a few times a year, but when they do, she drops everything to be of service. With four clients on retainer, it’s an extra $72K per year for a few days of work.

No matter who your clientele is, there are always a few who demand extraordinary service and are willing to pay extra for it. Capitalize on this by adding a VIP revenue stream to your offerings.

What you include in your VIP package will vary by industry, but here are a few thoughts:

  • Increased access to you
  • Special service, perhaps via another phone line or checkout lane
  • Invitation to exclusive events or sales or previews
  • Free gift wrapping
  • Free shipping
  • Special gifts
  • Friends are free
  • A richer experience
  • Birthday acknowledgement
    • A VIP offering is not the same as a points program. A points program encourages volume sales, while a VIP program is all about special perks, exclusivity, and a higher level of service.

      Does your business lend itself to a VIP offering? If so, give it a try.

5 Metrics to Gauge Your Business Performance

Sometimes, the most telling numbers in your business are not necessarily on the monthly reports. Although the foundation of your finances revolves around the balance sheet and income statement, there are a few numbers that, when known and tracked, can make a huge impact on your business decision-making. Here are five:

1. Revenue per employee.

Even if you are a solo business owner, revenue per employee can be an interesting number. It’s easy to compute: take total revenue for the year and divide by the number of employees you had during the year. You may need to average the number in case you had turnover or adjust it for part-time employees.

Whether your number is good or bad depends on the industry you’re in as well as a host of other factors. Compare it to prior years; is the number increasing (good) or decreasing (not so good)? If it’s decreasing you might want to investigate why. It could be you have many new employees who need training so that your productivity has slipped. It could also be that revenue has declined.

2. Customer acquisition cost.

If you’ve ever watched Shark Tank®, you know that CAC is one of the most important numbers for investors. This is how much it costs you in marketing and selling costs to acquire a new client. Factors such as annual revenue, or even lifetime value of a client will affect how low or high you can allow this number to go.

3. Cash burn rate.

How fast do you go through cash? The cash burn rate calculates this for you. Compute the difference between your starting and ending cash balances and divide that number by the number of months it covers. The result is a monthly value. This is especially important for startups that have not shown a profit yet so they can figure out how much cash they need to borrow or raise to fund their venture.

4. Revenue per client.

Revenue per client is a good measure to compare from year to year. Are clients spending more or less with you, on average, than last year?

5. Customer retention.

If you are curious as to how many customers return year after year, you can compute your client retention percentage. Make a list of all the customers who paid you money last year. Then create a list of customers who have paid you this year. (You’ll need to two full years to be accurate). Merge the two lists. Count how many customers you had in the first year. Then count the customers who paid you money in both years. The formula is:

Number of customer who paid you in both years / Number of customers in the first or prior year * 100 = Customer retention rate as a percentage

New customers don’t count in this formula. You’ll be able to see what percentage of customers came back in a year. You can also modify this formula for any length of time you wish to measure.

Try any of these five metrics so you’ll gain richer financial information about your business’s performance. And as always, if we can help, be sure to reach out.

What’s Your DSO?

If you grant credit to customers, then you have a balance in accounts receivable. DSO stands for Days Sales Outstanding, and this helps you measure how fast your receivables are being converted to cash.

Here’s how to calculate it:

DSO = Accounts receivable balance / Annual net credit sales * 365.

DSO is measured in days and it represents how many days it takes to collect the customer invoice balance and convert it to cash.

Whether the DSO measure is “good” or not varies by industry as well as the terms you’ve set for your clients. If you’ve set your invoices to be due in 30 days and your DSO is 45 days or less, that’s pretty good. If you’ve set your invoices to be due in 10 days and your DSO is 60 days, then you might want to consider a more aggressive collection policy to speed up your cash flow.

Here are some tips to reduce DSO:

1. Invoice clarity.

Make sure your invoices are accurate and clear. Make it clear whom to make the check out to, where to mail it, the due date, and the amount due. All of these features should be easy to find on the invoice.

2. Consider discounts.

A common discount term is 2/10, net 30. This means the customer can take two percent off their invoice if they pay in 10 days; otherwise they owe the whole amount in 30 days. If you have customers from large companies, discounts are often required by policy to be taken and this can speed up your payments from them.

3. Consider electronic payments.

Going paperless with your invoicing as well as your payment process can speed up the entire billing cycle. Customers getting their bills earlier will also pay earlier.

What’s your DSO? If you need help calculating it, give us a call.

5 Tips to Implement to Give Your Clients 5-Star Service

Are you interested in being known for your extraordinary customer service? Or perhaps you just want your customers to feel like it’s easy to work with you or purchase from you. If so, try these five tips for five-star client service.

1. A good old-fashioned handwritten thank you note.

Almost extinct, this customer pleaser shows you are willing to go the extra mile for a personal touch and connection with your client. You can purchase boxes of thank you notes from any stationery store or order them with your company logo from a local printer.

2. Remember your customer’s preferences.

High-end hotels are good at remembering what you like, and almost any business can add this idea by using a CRM – customer relationship management system – that stores customer preferences, order history, last conversations, and any notes you want to remember about the client. The trick is keeping the system notes updated and using them when it counts.

3. Deliver an unexpected extra.

When your customer least expects it, give them more than what they paid for. This manifests itself in many ways, depending on your business type. Here are some examples:

  • Restaurants: Give an appetizer, dessert, or coffee at no charge or pick up the bill of a regular once in a while.
  • Retail or offices: Offer an unexpected beverage and fruit tray or snacks like you would find at a spa or country club.
  • Real estate: Provide a list of local phone numbers, a fancy map or GPS app, or coupons to restaurants you partner with.
  • Construction: Offer a tool, a warranty, a list of reliable repairmen, or a full set of replacement lightbulbs.
  • Landscaping: Offer a birdfeeder, a fertilizer schedule, or a lawn tool.
  • Any office: Partner with a business that has your same client base and exchange coupons so that you have a book of them to give to all your clients.

4. Give clients your cell number.

Giving clients your personal or business cell number is not as risky as you might think. Very few clients will actually call you. Surprisingly, the goodwill you gain by sharing your personal number far outweighs any disruption. But here’s a warning – don’t share your number with sales reps of vendors; you’ll get relentless calls every day from them.

5. Offer a VIP membership.

Some customers care about and are willing to pay more for excellent service, and others don’t. Separate your customer base by offering a VIP membership. By paying a nominal fee each year, these members get priority access to your appointment time, sales, overnight shipping, or whatever else you can distinguish. The good news is it’s a new revenue stream as well.

Choose one of these ideas and implement it to increase your customer service to five stars.

Do the New Overtime Rules Affect You?

Effective December 1, 2016, federal overtime regulations will change and may affect how you are paying your employees.  These overtime updates will affect 4.2 million workers across the country.

The new rules will raise the salary overtime-eligibility threshold from $455/week to $913 ($47,476 per year).  This new threshold will increase every three years.  Salaried workers already entitled to overtime will get increased protection.

Employers have a choice of three actions they can take to employees who become eligible for overtime that weren’t before.

  1. Pay time-and-a-half for overtime work.
  2. Raise worker’s salaries above the new threshold.
  3. Limit worker’s hours to 40 per week.

Let’s say you have an employee that earns $500 per week and works 50 hours a week.  Previously, you didn’t pay overtime, but beginning December 1, 2016, you will need to.  At $12.50 per hour, you would owe them the regular $500 plus 10 hours of overtime at $187.50.

Let’s say you have an employee earning $800 per week and they work 50 hours.  Previously, you didn’t pay overtime, but now you will need to consider it.  You could pay them overtime, which works out to a weekly pay of $1100.  Or you can choose to give them a raise to $913 per week – the new threshold – and continue to exempt them from overtime.  The latter is the lowest cost alternative.

In both cases above, it may be cheaper to hire an additional part-time worker to work the 10 extra hours per week.

You can find more about the new overtime law here:
https://www.dol.gov/featured/overtime/

And if you have any questions about your payroll, feel free to reach out anytime.

Have Your Layer Cake and Eat It Too

The best cakes have layers and layers of different delicious flavors to enjoy. Stacked on top of one another, each layer is baked separately and becomes part of the whole. Like a layer cake, your business expenses have layers of meaning to them. When you can understand how expenses play a part in profit, you can manage them better.

Here’s how to make a layer cake of your business expenses. Let’s start with the most direct expenses.

Direct Costs

If you have inventory you will have a balance in the Cost of Goods Sold account. It should represent how much you paid for product or inventory that you are selling. It is the most direct expense of all the expenses; if you don’t spend this money, you would not have a product.

If you sell services, you should not have a balance in Cost of Goods Sold, but you will have direct expenses that are tied to performing your services. These might include labor from wages of the employees who carry out the services for clients. Any supplies directly involved with delivering services should be included as well.

You may also have other direct costs related to selling specific products or to servicing specific accounts.

Indirect Costs

The next layer includes indirect expenses. These expenses do not make up your product directly and might contribute to several different lines of products. Indirect costs might be attributable to a group of products or projects and can be apportioned accordingly.

Overhead

Although overhead is technically a form of indirect cost, it’s good to create a separate layer for it. It includes management salaries, rent, utilities, and other fixed costs that cannot be directly allocated to a product or service.

Assembling the Layers

A wonderful exercise is to classify each of your expense accounts in your Chart of Accounts as direct, indirect, or overhead. In that way, you can see how each account contributes to the costs of running your business. Some questions to ask yourself:

  • What is my gross margin before indirect costs and overhead?
  • What is my gross profit after indirect costs and before overhead costs?
  • How can I cut down on any of these categories of expense?
  • What is my breakeven volume in sales before overhead is factored in?
  • Can my profit margin be changed if I spent less in a certain area?

This layered view is just another way to view the financial aspects of your business and can help you make better decisions down the road.

You can also break the layers down even further by classifying the expenses as critical and non-critical. This will help you determine where best to invest while maintaining the level of profit you desire.

You can’t manage what you don’t measure. Layering your expenses will help you have your cake and eat it too. And if we can help, just reach out as always.

Cool Tech Tools: Cloud Storage

Have you ever wished you didn’t have to buy yet another server? Do you have to delete old files on your hard drive to make room for new ones? If disk space is an issue in your company, the good news is there may be a better and cheaper way: cloud storage.

You might think cloud storage is only for large companies, but it’s surprisingly easy to use no matter whether you have a full technology department or you simply call your neighbor when your PC starts doing something strange.

One such vendor is Amazon with their S3 product in their AWS or Amazon Web Services division. The three S’s stand for Simple Storage Service. It works just like your PC’s hard drive. Think of a filing cabinet where only you have the key to all your business’s private files. Instead of folders (or file drawers), Amazon calls them buckets, and instead of files (or Pendaflex®), Amazon calls them objects. Once you set up your account, you can create buckets and upload your files as objects in the cloud.

If you have large files like video files, old records you need to keep for tax purposes but don’t access any more, or just a need for more disk space, this service is perfect. Amazon charges three cents per GB monthly, which is much cheaper than an additional server, website hosting rates, or even external disk drives.

There are many options beyond basic storage, including who can access your files. You can also use it to store data used in programming and there are developer guides for companies that have that need. The S3 product is not designed to be used to share files like a DropBox-type product although you can make certain files publicly accessible. The S3 is also much cheaper than file-sharing products as well.

You can check out the S3 product here: https://aws.amazon.com/s3/

Get smart about storage options and you’ll save a lot of money down the road.

Seven Small Business Risks You Might Not Know You’re Taking

Running a small business is often about taking and managing risks. Market risks are normal but business and tax risks are another thing altogether. Most business and tax-related risks can be managed as long you know about them. Here are seven small business risks you will want to make sure are covered.

1. Best Choice of Entity

Are you operating as a corporation, limited liability company, partnership, or sole proprietor? More importantly, is the entity you are operating under providing you with the greatest tax benefits and separation from personal liability? If not, you might want to explore the alternatives to make sure you’re taking the amount of risk that’s right for you.

2. Employees or Contractors

Are your team members properly categorized when it comes to the IRS’s rules about employees versus contractors? Unfortunately, it’s not about what you and your team member decide you want. If you decide to hire contractors and the IRS determines they are employees, you could owe back payroll taxes that can cripple a small business. So you’ll want to do the right thing up front and make sure you and the IRS are in agreement, or be willing to take a future risk.

3. Insurance

If you’d like to protect yourself from possible losses through a disaster, theft, or other incident, insurance can help. There are a lot of kinds to choose from, and you’ll likely need more than one. At the minimum, make sure you’re covered by:

  • Business property insurance, renters insurance, or a homeowners rider to protect your physical assets.
  • Professional liability or malpractice insurance, if applicable, to protect you from professional mistakes including ones made by employees.
  • Workers compensation insurance, to cover employee accidents on the job.
  • Auto insurance or a non-owned policy if employees drive their car for work errands.

You may also want personal umbrella insurance, life insurance, and health insurance. Check with an insurance agent to get a comprehensive list of options.

4. Sales Tax Liability

Are you sure you’re collecting sales tax where you should be? As the states get greedier, they invent new rules for liability. For example, if one of your contractors lives in another state, you may owe sales tax on sales to customers who live there even if you don’t live there or have an office there.

Nexus is a term that describes whether you have a presence in a state for tax purposes. Having an office, an employee or contractor, or a warehouse can extend nexus so that you’d need to collect and file sales tax for those states. If you’re in doubt, check with a professional, and let us know how we can help.

5. Underpricing

Most small businesses make the mistake of underpricing their services, especially when they start out. If you started out that way, it’s awfully hard to catch up your pricing to a reasonable level. Knowing the right price to charge can make the difference between whether the company last six months or six years. You can mitigate this risk by getting cost accounting help from your accountants who can help you calculate your margins and determine if you’re covering your overhead and making a profit.

6. Legal Services

Legal services can be expensive for a small business, so sometimes owners cut corners and take risks. Attorneys are needed most when it comes to setting up your entity, reviewing contractual agreements such as leases and loan agreements, settling conflicts, advising on trademark protection, and creating documents such as terms of service, employment agreements, and privacy policies. Just one mistake on any of these documents can cost a lot, so be sure it’s worth the risk.

7. Accounting Services

Doing your own accounting and taxes can be risky if they’re done wrong or incomplete. You could end up paying more than you should if you leave out deductions you’re entitled to. Worse, if you do your books wrong, you could end up overpaying taxes without realizing it. A common bookkeeping error results in doubling sales, and while it might look good, you certainly don’t want to pay more than what’s been truly received.

How did you do with these seven risks? If you need to reduce your risks in any of the areas, feel free to reach out for our help.

Five Steps to Getting a Loan

Most small businesses need help with cash during certain stages of their growth. If you find that you have more plans than cash to do them with, then it might be time for a loan. Here are five steps you can take to make the loan process go smoother.

1. Make a plan.

Questions like how much you need and how much you will benefit from the cash infusion are ones you should consider. If you don’t already have some version of a budget and business plan, experts recommend you spend a bit of time drafting those items. There’s nothing worse than getting a loan and finding out you needed twice the cash to do what you wanted to accomplish.

2. Know your credit-related numbers.

Do you know your credit score? Is there anything in your credit history that needs cleaning up before it slows down the loan approval process?

Take a look also at your standard financial ratios. These are ratios like your current ratio (current assets / current liabilities) and debt-to-equity ratio. If these are in line with what your lender is expecting, then you are in good shape to proceed.

3. Research your options.

Luckily, there are many more options for financing your business today than there have been in the past. Traditional options, such as banks, still exist, but it can be difficult to get a bank loan for a small business.

Here are some online loan sources where investors are matched with borrowers via an online transaction:

  • Kabbage
  • OnDeck
  • LendingClub
  • FundBox
  • BlueVine

Or you can go to Fundera and compare which loan is the most economical.

There is also crowdfunding, which is very different from a loan. Crowdfunding is a way to raise cash from many people who invest a small amount. Top sites include GoFundMe and KickStarter, where you can find out more about how it works.

Other ways to get cash include tapping into your personal assets: using credits cards, refinancing a house, and borrowing money from family and friends.

4. Create your loan package.

Most lenders will want to know your story, and a loan package can provide the information they need to decide whether they want to loan you money or not. A good loan package includes the following:

  • A narrative that includes why you need the loan, how much you want, and how you will pay it back. A good narrative will also list sources of collateral and a willingness to make a personal guarantee.
  • Current financial statements and supporting credit documentation, such as bank statements and credit history.
  • A business plan and budget, or portions of it, that cover your business overview, vision, products and services, and market.
  • A resume or biography of the business owners and a description of the organization structure and management.

While it takes time to put together a great loan package, it’s also a great learning experience to go through the exercise of pulling all of the information together.

5. Execute!

You’re now ready to get your loan. Or not. Going through these five steps helps you discover more about your business and helps you make an informed decision about whether a loan is still what you want and need.

Throughout the process, you may have learned new information that tells you you’re not quite ready for a loan, or that in fact, you are. At any rate, preparing for a loan is a great learning process, and the good news is there are lots of avenues for small businesses to get the cash they need to grow.

Marketing by the Numbers

Two very important skills for entrepreneurs to master are marketing and finances. Combine them by understanding the numbers behind marketing, and you have an even more powerful understanding of exactly what makes your business tick.

Key Numbers – Cost Per Client Acquisition

Do you know how much it costs your business to bring in one client? The technical term is “Cost per customer acquisition,” and it’s computed by adding the total marketing and sales costs excluding retention costs and dividing them by the total number of clients acquired during a period of time.

Cost per customer acquisition is important to know because then you can compute how long it takes before your business begins to make a profit on any one customer. In software application services with a monthly fee, the breakeven for a client can be around ten months.

It’s essential to understand this dynamic for pricing and volume planning purposes. If your services or products are priced too low so that your acquisition costs are not recouped in a reasonable period of time, it can play havoc with your cash flow as well as your profits. If you don’t have enough volume to cover overhead and acquisition costs, then your company will be in trouble in the long term.

Customer Lifetime Value

There is a simple and an academic formula for customer lifetime value. You can estimate it by multiplying the average sale of a customer by the average number of visits per year by the number of years they remain a customer. That’s the easy version.

The more difficult version of this formula takes into account retention rates and gross profit margins. The formula is: Average customer sales for life times the gross profit margin divided by the annual churn rate.

Once you know and track these numbers in your business, you’ll be better able to make smart decisions about your marketing investments and your pricing. And if we can help you, please reach out as always.

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